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Tax Credits, Source Rules, Trade and Electronic Commerce: Behavioral Margins and the Design of International Tax Systems

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  • Harry Grubert

Abstract

The paper provides a framework for designing international tax rules by outlining the various behavioral margins they apply to. It then goes on to analyze three specific policy issues in terms of preserving the neutrality of choices along the relevant margins: (1) Which foreign taxes should be credited against home country tax liabilities? (2) Should the income from intangible assets like patents be taxed by the host country or the country in which it was developed? (3) Should the local sales by a foreign company determine the income tax imposed by the consuming country? Should the rules be changed because of electronic commerce? The analysis shows that the current foreign tax credit rules lack any coherent basis, either in terms of efficiency or fairness. For example, a tax on gross assets should be creditable, as well as a tax on gross income that does not allow deductions for interest. The income from intangible assets like patents should be sourced in the country in which the intangible asset was developed and be subject to its tax rate. That preserves the undistorted choice among alternative locations for exploiting an intangible. The analysis of the relationship between income taxes and trade taxes shows that in extreme cases a tax on imports may be justified to offset the distorting effect of income taxes. But electronic commerce is unlikely to create such a case. It is like any other technical change that lowers transactions costs.

Suggested Citation

  • Harry Grubert, 2004. "Tax Credits, Source Rules, Trade and Electronic Commerce: Behavioral Margins and the Design of International Tax Systems," CESifo Working Paper Series 1366, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_1366
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp1366.pdf
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    References listed on IDEAS

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    1. McLure, Charles E. Jr. & Zodrow, George R., 1998. "The Economic Case For Foreign Tax Credits for Cash Flow Taxes," National Tax Journal, National Tax Association, vol. 51(n. 1), pages 1-22, March.
    2. Mintz, Jack & Weiner, Joann Martens, 2003. "Exploring Formula Allocation for the European Union," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(6), pages 695-711, November.
    3. Charles E. McLure, Jr. & Walter Hellerstein, 2002. "Does Sales-only Apportionment of Corporate Income Violate the GATT?," NBER Working Papers 9060, National Bureau of Economic Research, Inc.
    4. Gordon, Roger H, 1992. " Can Capital Income Taxes Survive in Open Economies?," Journal of Finance, American Finance Association, vol. 47(3), pages 1159-1180, July.
    5. Baldwin, Richard E. & Krugman, Paul, 2004. "Agglomeration, integration and tax harmonisation," European Economic Review, Elsevier, vol. 48(1), pages 1-23, February.
    6. Charles McLure Jr., 2000. "Alternatives to the concept of permanent establishment : e-commerce and taxation," CESifo Forum, Ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 1(3), pages 10-16, October.
    7. McLure, Charles E. Jr. & Zodrow, George R., 1998. "The Economic Case for Foreign Tax Credits for Cash Flow Taxes," National Tax Journal, National Tax Association, vol. 51(1), pages 1-22, March.
    8. Gordon, Roger H, 1986. "Taxation of Investment and Savings in a World Economy," American Economic Review, American Economic Association, vol. 76(5), pages 1086-1102, December.
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